November 12, 2007
Calculated bet | With five acquisitions in the last 12 months, Northeast Bank has made a splash in Maine's insurance market
By Whit Richardson
Last year, Northeast Bank began an acquisition binge, gobbling up five Maine insurance agencies in a bid to diversify its income streams and product offerings.
The strategy to create "needs-based, one-stop shopping for clients" is one Northeast Bank President Jim Delamater says has been fomenting in his mind since taking over the bank in 1981, when it was known as Bethel Savings Bank. "I never dreamed it would take 27 years," he says.
Over the years, the Lewiston-based bank added financial planning and investments to its roster of products and services, but Delamater says the bank kept running into "the insurance wall," when customers asked about insurance products and Northeast's staff was forced to send potential customers elsewhere.
The recent string of acquisitions ˆ which cost roughly $2.5 million, according to the 2007 annual report from the bank's parent company, Northeast Bancorp ˆ began in November 2006 when the bank's insurance subsidiary, Northeast Bank Insurance Group, acquired Palmer Insurance in Turner and its six employees. More acquisitions soon followed: The bank acquired Sturtevant and Ham Insurance in Livermore Falls in December 2006, Southern Maine Insurance Agency in Scarborough in April 2007, Russell Insurance Agency in Madison in June 2007, and The Hartford Insurance Agency in Lewiston in August 2007. The acquisitions are part of a "master plan," says Delamater, to offer deals on loan rates or insurance premiums for customers who do both banking and insurance business with Northeast.
Besides wanting to offer customers one-stop shopping for banking, insurance and financial planning products, banks like Northeast increasingly are looking for ways to diversify their income streams in the face of falling income from traditional banking products.
Other banks in Maine have "dabbled" in the insurance business, says Chris Pinkham, president of the Maine Association of Community Banks. "So it's not unique," he says. "What's unique is that [Northeast Bank] has bought quite a few of them."
It's a different strategy, Pinkham says. "And in any strategy, everyone wants to know: Is it the right idea or the wrong idea?"
Rule change
Banks haven't always been able to acquire insurance agencies. Only in the late 1990s were Depression-era barriers ˆ designed to keep the banking, investment and insurance industries separate ˆ lifted. Maine overhauled its banking regulations in 1997 to allow mergers and acquisitions among banks, financial planning companies and insurance agencies. Two years later, federal regulators followed suit.
As a result, a number of Maine banks ˆ from Peoples Heritage Financial Group, now TD Banknorth, to Bangor Savings Bank ˆ sped into the insurance business.
This movement into the insurance business is "not unique to Maine," says Bob Schermund, spokesman for America's Community Bankers, based in Washington, D.C. "Community banks are diversifying products and services," Schermund says. "That's really the story line."
Diversifying sources of income has become especially important as banks, including Northeast Bank, have watched their net interest income ˆ generated mostly through interest on loans ˆ decrease. Northeast Bancorp's net income for its fiscal year 2007, which ended June 30, fell 53%, from roughly $4 million in 2006 to $1.9 million. During the same time though, its noninterest income, which is generated largely by the bank's investment and insurance divisions, jumped 20% to $7.9 million. And the hits just keep coming: During the three months through September ˆ the first quarter of its 2008 fiscal year ˆ noninterest income increased 36% to nearly $2 million.
Noninterest income now makes up 34% of Northeast Bancorp's revenue, an eight-percentage-point increase from 2006, according to the annual report. "Our diversity of income is so significant," Delamater says, "it, in our minds, gives us a significant advantage."
In 2002, Northeast Bank, through its subsidiary Northeast Bank Financial Services Inc., entered the insurance business when it purchased Kendall Insurance Agency in Bethel. Delamater says that acquisition offered him and Northeast's staff an opportunity to learn about the insurance business ˆ a business Delamater didn't know as intimately as banking. He says he assumed, like others, that when a person comes looking for insurance, an insurance agency just "spits out a quote." "I learned it's nothing like that at all," he says. Instead, insurance agencies are at the mercy of the insurance carriers, which take a hard look at policies insurance agencies are shopping around, he says.
In 2004, Northeast purchased Rangeley-based Sargent Insurance Agencies, which included branches in Anson, Mexico and Jackman, for nearly $1 million, according to Northeast Bancorp's annual reports. Craig Sargent, the agency's owner, became president of Northeast's insurance division, which in 2005 was renamed Northeast Bank Insurance Group.
While the concept of offering insurance alongside loans and other banking products makes sense on the outside, the internal office cultures surrounding those two products can be very different, says Delamater. The merging of the two companies and the different cultures that exist in insurance and banking took some time, Sargent says. "It's really a sales culture versus a service culture to a degree, and is extremely difficult to merge these cultures together."
Pay to play
When looking for acquisitions, Delamater says Northeast looked for geographic diversity to extend the bank's reach, but also for agencies with existing relationships with insurance carriers that Northeast could then do business with. For example, Southern Maine Insurance Agency, which Northeast acquired in April, had a deal with an insurance carrier that allowed it to write insurance for all the Subway chain stores in New Hampshire and Maine.
Meanwhile, The Hartford Insurance Agency acquisition brought millions of dollars worth of business in the medical insurance field, and brought insurance carriers like Anthem and Cigna into Northeast's growing list of carriers. "So we have filled an entire void with the Hartford acquisition," Sargent says, adding that the recent deals mean Northeast Bank Insurance Group "can insure everything but planes and trains."
Sargent says more acquisitions will come. He won't say when, but says Northeast Bank Insurance Group will likely expand toward the Midcoast, southern Maine and eventually New Hampshire.
So is the strategy working? At the moment, it's tough to tell, in large part because the company has outgrown its accounting technology. (The company is spending $250,000 to upgrade its accounting platform, which it expects to launch in February.) But there are tangible successes: The increase in noninterest income from insurance premiums has certainly helped, and Delamater says the division needed to reach $30 million in premiums to hit profitability ˆ a goal it reached during its fiscal year 2008 first quarter, which ended Sept. 30. "We were content to have losses in the division, because we knew we were building for the future," he says.
One of the visible ways the acquisitions have helped both insurance agencies and Northeast Bank is through the number of referrals generated, Sargent says. The insurance group gets between 110 and 120 referrals, or potential leads on customers looking to buy insurance, per month from the banking side of the company, Sargent says. While the national average for the successful conversion of referrals to business is between three percent and 18%, Sargent says Northeast Bank Insurance Group has been able to convert 47% of those referrals into business.
Northeast Bank Insurance Group recently has been charged with returning the favor, referring more insurance customers to the banking and investment staff, Sargent says. These recognizable benefits of working together also will help the integration of the recently acquired insurance agencies go more smoothly, Sargent says. "When all the divisions are giving referrals, all the culture clashes will all but disappear."
The strategy to create "needs-based, one-stop shopping for clients" is one Northeast Bank President Jim Delamater says has been fomenting in his mind since taking over the bank in 1981, when it was known as Bethel Savings Bank. "I never dreamed it would take 27 years," he says.
Over the years, the Lewiston-based bank added financial planning and investments to its roster of products and services, but Delamater says the bank kept running into "the insurance wall," when customers asked about insurance products and Northeast's staff was forced to send potential customers elsewhere.
The recent string of acquisitions ˆ which cost roughly $2.5 million, according to the 2007 annual report from the bank's parent company, Northeast Bancorp ˆ began in November 2006 when the bank's insurance subsidiary, Northeast Bank Insurance Group, acquired Palmer Insurance in Turner and its six employees. More acquisitions soon followed: The bank acquired Sturtevant and Ham Insurance in Livermore Falls in December 2006, Southern Maine Insurance Agency in Scarborough in April 2007, Russell Insurance Agency in Madison in June 2007, and The Hartford Insurance Agency in Lewiston in August 2007. The acquisitions are part of a "master plan," says Delamater, to offer deals on loan rates or insurance premiums for customers who do both banking and insurance business with Northeast.
Besides wanting to offer customers one-stop shopping for banking, insurance and financial planning products, banks like Northeast increasingly are looking for ways to diversify their income streams in the face of falling income from traditional banking products.
Other banks in Maine have "dabbled" in the insurance business, says Chris Pinkham, president of the Maine Association of Community Banks. "So it's not unique," he says. "What's unique is that [Northeast Bank] has bought quite a few of them."
It's a different strategy, Pinkham says. "And in any strategy, everyone wants to know: Is it the right idea or the wrong idea?"
Rule change
Banks haven't always been able to acquire insurance agencies. Only in the late 1990s were Depression-era barriers ˆ designed to keep the banking, investment and insurance industries separate ˆ lifted. Maine overhauled its banking regulations in 1997 to allow mergers and acquisitions among banks, financial planning companies and insurance agencies. Two years later, federal regulators followed suit.
As a result, a number of Maine banks ˆ from Peoples Heritage Financial Group, now TD Banknorth, to Bangor Savings Bank ˆ sped into the insurance business.
This movement into the insurance business is "not unique to Maine," says Bob Schermund, spokesman for America's Community Bankers, based in Washington, D.C. "Community banks are diversifying products and services," Schermund says. "That's really the story line."
Diversifying sources of income has become especially important as banks, including Northeast Bank, have watched their net interest income ˆ generated mostly through interest on loans ˆ decrease. Northeast Bancorp's net income for its fiscal year 2007, which ended June 30, fell 53%, from roughly $4 million in 2006 to $1.9 million. During the same time though, its noninterest income, which is generated largely by the bank's investment and insurance divisions, jumped 20% to $7.9 million. And the hits just keep coming: During the three months through September ˆ the first quarter of its 2008 fiscal year ˆ noninterest income increased 36% to nearly $2 million.
Noninterest income now makes up 34% of Northeast Bancorp's revenue, an eight-percentage-point increase from 2006, according to the annual report. "Our diversity of income is so significant," Delamater says, "it, in our minds, gives us a significant advantage."
In 2002, Northeast Bank, through its subsidiary Northeast Bank Financial Services Inc., entered the insurance business when it purchased Kendall Insurance Agency in Bethel. Delamater says that acquisition offered him and Northeast's staff an opportunity to learn about the insurance business ˆ a business Delamater didn't know as intimately as banking. He says he assumed, like others, that when a person comes looking for insurance, an insurance agency just "spits out a quote." "I learned it's nothing like that at all," he says. Instead, insurance agencies are at the mercy of the insurance carriers, which take a hard look at policies insurance agencies are shopping around, he says.
In 2004, Northeast purchased Rangeley-based Sargent Insurance Agencies, which included branches in Anson, Mexico and Jackman, for nearly $1 million, according to Northeast Bancorp's annual reports. Craig Sargent, the agency's owner, became president of Northeast's insurance division, which in 2005 was renamed Northeast Bank Insurance Group.
While the concept of offering insurance alongside loans and other banking products makes sense on the outside, the internal office cultures surrounding those two products can be very different, says Delamater. The merging of the two companies and the different cultures that exist in insurance and banking took some time, Sargent says. "It's really a sales culture versus a service culture to a degree, and is extremely difficult to merge these cultures together."
Pay to play
When looking for acquisitions, Delamater says Northeast looked for geographic diversity to extend the bank's reach, but also for agencies with existing relationships with insurance carriers that Northeast could then do business with. For example, Southern Maine Insurance Agency, which Northeast acquired in April, had a deal with an insurance carrier that allowed it to write insurance for all the Subway chain stores in New Hampshire and Maine.
Meanwhile, The Hartford Insurance Agency acquisition brought millions of dollars worth of business in the medical insurance field, and brought insurance carriers like Anthem and Cigna into Northeast's growing list of carriers. "So we have filled an entire void with the Hartford acquisition," Sargent says, adding that the recent deals mean Northeast Bank Insurance Group "can insure everything but planes and trains."
Sargent says more acquisitions will come. He won't say when, but says Northeast Bank Insurance Group will likely expand toward the Midcoast, southern Maine and eventually New Hampshire.
So is the strategy working? At the moment, it's tough to tell, in large part because the company has outgrown its accounting technology. (The company is spending $250,000 to upgrade its accounting platform, which it expects to launch in February.) But there are tangible successes: The increase in noninterest income from insurance premiums has certainly helped, and Delamater says the division needed to reach $30 million in premiums to hit profitability ˆ a goal it reached during its fiscal year 2008 first quarter, which ended Sept. 30. "We were content to have losses in the division, because we knew we were building for the future," he says.
One of the visible ways the acquisitions have helped both insurance agencies and Northeast Bank is through the number of referrals generated, Sargent says. The insurance group gets between 110 and 120 referrals, or potential leads on customers looking to buy insurance, per month from the banking side of the company, Sargent says. While the national average for the successful conversion of referrals to business is between three percent and 18%, Sargent says Northeast Bank Insurance Group has been able to convert 47% of those referrals into business.
Northeast Bank Insurance Group recently has been charged with returning the favor, referring more insurance customers to the banking and investment staff, Sargent says. These recognizable benefits of working together also will help the integration of the recently acquired insurance agencies go more smoothly, Sargent says. "When all the divisions are giving referrals, all the culture clashes will all but disappear."
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